Adler Industries Is a Vertically Integrated Firm with Several Divisions

question 10

Multiple Choice

Adler Industries is a vertically integrated firm with several divisions that operate as decentralized profit centres. Adler's System Division manufactures scientific instruments and uses the products of two of Adler's other divisions. The Board Division manufactures printed circuit boards (PCBs) . One PCB model is made exclusively for the Systems Division using proprietary designs, while less complex models are sold in outside markets. The products of the Transistor Division are sold in a well-developed competitive market; however, one transistor model is also used by the Systems Division. The costs per unit of the products used by the systems Division are presented below: PCB Transistor
Direct materials $2.50 $0.80
Direct labour 4.50 1.00
Variable overhead 2.00 0.50
Fixed overhead 0.80 0.75
Total cost $9.80 $3.05
The Board Division sells its commercial products at full cost plus a 25% markup and believes the proprietary board made for the Systems Division would sell for $12.25 per unit on the open market. The market price of the transistor used by the Systems Division is $3.70 per unit.
(CMA) Assume the Systems Division is able to purchase a large quantity of transistors from an outside source at $2.90 per unit. The Transistor Division, having excess capacity, agrees to lower its transfer price to $2.90 per unit. This action would:

• A)Optimize the profit goals of the Systems Division while subverting the profit goals of Adler industries
• B)Optimize the overall profit goals of Adler Industries
• C)Subvert the profit goals of the Transistor Division while optimizing the profit goals of the Systems Division
• D)Cause mediocre behaviour in the Transistor Division as lost opportunity costs increase

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Definitions:

Overt Behavior

Refers to actions and behaviors that are observable and measurable, as opposed to inner processes like thoughts and feelings.

Rigid Memory

A memory condition characterized by inflexibility, where past experiences overly dictate current behavior and thoughts.

Vicariously

Experiencing something through another person's actions by imagining what it would be like to be in their situation.

Reinforcement

In psychology, a concept in operant conditioning where a behavior is strengthened or increased by following it with a positive stimulus or the removal of a negative one.